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July FOMC meeting – all meetings now “live” for taper?

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July FOMC meeting – all meetings now “live” for taper?                                                     

  • USD: Citi analysts maintain that the FOMC overnight meets their hawkish expectation by providing warning that tapering may be announced at “coming meetings.” The message from the FOMC (according to Citi analysts) is that all meetings are “live” for a possible announcement of tapering. More details on the likely composition and pace of tapering may be available in meeting minutes released August 18. Citi analysts maintain their base case for tapering to be announced in September, commence in December and proceed at a pace of $10bln/month in Treasuries and $5bln/month in MBS          

  • USD: The major change to the FOMC statement is indication that the Fed would assess progress ‘in coming meetings’ while maintaining optionality by conditioning it on significant job growth. Additionally, the Fed repeats that it is watching upside inflation risks carefully. In his press conference, Chair Powell expresses a high level of confidence that the jobs market would strengthen over time, saying – “this is a very strong labor market. If you look at the number of job openings compared to the number of unemployed, we're clearly on a path to a very strong labor market with high participation, low unemployment, high employment, wages moving up across the spectrum”. Powell also acknowledges that inflation risks are to the upside but sticks to the familiar language around “transitory” (if larger than expected) increases due to “bottlenecks.” He once again confirms an emphasis on watching inflation expectations.    

  • USD: While Chair Powell’s comments could be seen as “hawkish”, he clarifies that there is still “some ground to cover” and would “want to see some strong jobs numbers” before concluding that substantial further progress has been made. This should refocus market attention on the two jobs reports between now and the mid-September meeting. Important to the view that tapering will be announced at the September FOMC is the 1mln+ jobs reading Citi analysts expect for the month of July (released next week) and another strong reading in August. There will also be two inflation prints before the September FOMC where the team see upside risks, including from shelter prices. 

  • USD: Chair Powell also repeats that the committee would signal “in advance” of tapering asset purchases and clarifies that Fed officials will continue to communicate on this through public statements and meeting minutes. This may be a hint that the late-August Jackson Hole conference is a potential venue for giving more indications that tapering may be upcoming. Chair Powell also confirms details on the potential pace and composition of tapering asset purchases have been discussed and Minutes released on August 18 may provide more clarity on the likely composition and pace of tapering.     

 

Data releases overnight    

  • AUD: Q2 transient inflation unlikely to deter the RBA from delaying tapering - Australia’s headline CPI increases by 0.8% in Q2, above the 0.7% consensus estimate. The yearly growth rate also jumps from 1.1% to 3.8%, partly from the very weak base of Q2 last year when the CPI fell by 1.9%. This is the fastest growth rate since Q3 2008 when yearly CPI growth hit 5.0%. The trimmed mean result for Q2 comes in at 0.5%, in-line with expectations for a 1.6% yearly gain. At this pace, the trimmed mean is back at its pre-pandemic rate of yearly growth, although it remains below the bottom of the RBA’s 2% to 3% target band. The data shows supply-chain pressures are rising but are limited and won’t necessarily lead to persistently higher inflation. This means the RBA will likely look through some of the price pressures as transient. Instead, the Bank remains more concerned around the impact of the recent lockdowns on the outlook for the labor market. With the Federal Government resisting growing calls for a return of the JobKeeper wage subsidy, the RBA will need to maintain highly accommodative monetary policy for longer. In the near-term, this is likely to include an extension of $AU5bn per week in LSAP and a postponement in September’s expected tapering to $AU4bn until at least November.    
  • CAD: Canada’s headline CPI rises 0.3%MoM in June, a slightly softer increase than consensus for a 0.4% gain. Due to unfavorable base effects, the Y/Y reading falls to 3.1% from 3.6%YoY in May. After revisions, the 3 (key) core measures continue to average 2.2%, just above the 2% target. Citi analysts expect that the last 4-5 months of stronger than usual price increases in the core measures should keep readings elevated into 2022. Additionally, survey indications of rising prices and capacity constraints imply sustainably at or above target core inflation on average later this year. Citi analysts continue to expect that capacity constraints and a strong summer recovery period will imply a sustained return of the core inflation measures back to, or slightly above, 2% sooner than the BoC current expects. This would likely support another hawkish shift by the BoC around the October meeting.    

 

Data releases for the remainder of this week                                   

  • USD: US Personal Income – Citi: 0.1%, median: -0.5%, prior: -2.0%; Personal Spending – Citi: 0.6%, median: 0.6%, prior: 0.0%; Core PCE MoM – Citi: 0.4%, median: 0.6%, prior: 0.5%; Core PCE YoY – Citi: 3.4%, median: 3.7%, prior: 3.4% - Citi analysts also expect a solid, but more moderate 0.4% increase in core PCE inflation in June that should keep the Y/Y reading at 3.4%. Base effects in core PCE are somewhat unfavorable throughout the next few months, although Y/Y core PCE is still likely to remain above 3%YoY through year-end.  

  • USD: US GDP Annualized QoQ – Citi: 9.2%, median: 8.5%, prior: 6.4%; Core PCE QoQ – Citi: 6.1%, median: 6.0%, prior: 2.5% - Citi analysts expect real GDP growth of 9.2% (QoQ SAAR) in Q2, a stronger pick-up in activity than over the last few quarters. This would put the level of real output firmly back above pre-COVID levels of activity from Q4-2019, although the composition of GDP growth will still differ substantially from pre-pandemic patterns.

  • EUR: Euro area HICP Inflation, July Flash: Forecast 2.0% YY, prior 1.9% YY – Citi analysts see euro area core HICP dropping from 0.9% YY to 0.4% YY in July, before bouncing back above 1% from August onwards.    

  • CNH: China Manufacturing PMI July: Citi 50.6, Consensus 51.0, Previous 50.9 – Citi analyts expect manufacturing PMI to soften modestly to 50.6 in July. Blast furnace operating rates by steel mills dropped sharply around the CCP’s July 1 celebration for pollution control and remained visibly lower than in June afterwards. Shortage of chips and electricity may also curb production while the Emerging Industries PMI indicates a weakness in demand.        

 

This is an extract from the Daily Currency Update, dated July 29, 2021. Please approach a Citigold Relationship Manager if you would like more information. For the latest updated CitiFX house views and strategy (updated every Monday) please click here - 

 https://asia.citi.com/wealthinsights/citifx-house-views-and-strategy

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